Real Estate Forum - October 2013

There are many benefits to financing a commercial real estate deal with CMBS. Traditionally, though, the ability to sidestep retrading is not one of them. Indeed, retrading—the situation in which a quote and terms are provided and then, at closing, changed to reflect market conditions or new issues that may have arisen during the underwriting—is considered one of the drawbacks to CMBS.

A More Flexible CMBS…

Now, though, we are dealing with a new brand of CMBS—one that is more resilient, more cognizant of underwriting issues and more aggressive in explaining the industry’s nuances to the Capitol.

One that is, as Scurtis noted, more flexible as well. In recent
months there has been a slow but steady emergence of floating-rate
CMBS, some observers interviewed for this article noted. “It is still
in its infancy right now, but this is definitely something we are see-
ing now,” Kelly M. Wrenn, a partner at Ballard Spahr LLP, based in
Washington, DC, says.

Another new trend, at least for 2013, has been the emergence of interest-only CMBS loans, David Kessler, director of the firm’s national commercial real estate practice and co-managing partner of CohnReznick’s Bethesda office, says.

We are also dealing with a new environment, one in which investors are still eager for yields and economic and industry fundamentals are improving.

….But Still Facing a Giant Question Mark

We don’t want to paint a completely unrealistic picture of CMBS, though. In many respects the conduit market is facing an uphill climb.

That lobbying campaign to explain the industry to Capitol Hill? The battle’s only half done. And for those eager investors? Rising interest rates could change that dynamic awfully quick. Ditto commercial real estate’s currently favorable fundamentals.

Also, while floating-rate loans and IO carve-outs may be making a reappearance, CMBS has hardly shed its reputation for rigid processes.

Many borrowers, if they have any choice at all, will opt for another form of financing over CMBS.

Steven McCraney, president and CEO of McCraney Property Co., a West Palm Beach, FL-based developer, knows full well the value of having a robust conduit market: during the depth of the recession, a CMBS loan kept the company afloat. “Nothing else was available to us and we had a very good profile as a borrower,” McCraney says.

Today the company finds a wealth of choices available and is opting for more traditional capital.

“We are building a 500,000-square-foot
industrial project in Orlando, and we did look
at CMBS for construction financing,” he says.
“But we went with a traditional lender because
it provided greater flexibility.”
“Borrowers learned some hard lessons dur-
ing the recession about CMBS,” says Lydia
Stefanowicz, a New York-based partner at
Edwards Wildman Palmer.

“It is not like dealing with a local bank or insurance company, where you can call and talk with a point person if you are having trouble or need a workout,” she says.

“Borrowers found a lot more forgiveness with local banks than they did with CMBS, which is why I think there is more reluctance to go with CMBS unless there is no other option.”